Seven Key Value Stats

6/1/2015


The quest for value stocks never ends. And that's part of the problem.

With millions of investors looking for values, you need an edge to uncover the best stocks. This week our Quadrix stock-rating system provides two edges:

1) We identify industry groups stuffed with stocks that score well in key value variables.

2) We present A-rated (above average) stocks that score well in those same variables.

Of the six category scores used to derive our Quadrix Overall score, Value works best. In 12-month rolling periods since the end of 1994, the top quintile (one-fifth) of the S&P 1500 Index as measured by Value score has outperformed the average stock in the index by an average of 2.8%. Top Overall scorers managed 2.3% outperformance, and no other category score topped 1%. Over the last three years, a fairly rough period for Quadrix, Value was one of only two category scores that effectively identified stocks that would outperform.

To see how the Value score ticks, we delved into its component factors. Most of the individual valuation ratios have predictive power, but seven stood out over the last three years, as well as over long periods. Only these seven — price/sales, price/free cash flow, trailing price/earnings, price/earnings on next-year estimate, price/earnings on current-year estimate, price/book, and enterprise value/EBITDA — delivered at least 1% average outperformance for both time periods.

Those seven key statistics helped us find fertile fields for value investors.

Industries: Of the 113 industry groups in the S&P 1500 with at least four stocks, only 12 earned average scores above 50 in at least six of the seven statistics. We excluded industries with three or fewer stocks, as averages don't tell us as much with small groups.

Not all of the stocks in these industries are good values, and in several of the groups we recommend companies that do not score well in the seven valuation ratios. However, when an industry as a whole looks cheap, it suggests the stocks in that industry have fallen out of favor. And buying high-quality, high-potential stocks at times when investors have soured on the group is a recipe for success. Investors who like to do their own research may find the industries listed in the table below a good starting point.

INDUSTRY COMPARISON
Standard & Poor's breaks up the stock market into more than 140 industries. Of them, only 12 average scores above 50 in at least six of the seven value factors we found particularly effective at identifying outperforming stocks.
----- Industry Average Quadrix Rank For Key Value Factors -----
Industry Average
Quadrix Scores
Industry (No. Of Companies)
Price/
Earnings
Price/
Sales
Price/
Book
P/E On
Next-
Yr. Est.
P/E On
Curr.-
Yr. Est.
Price/
Free
Cash
Flow
Ent.
Value/
EBITDA
No. Of
Average
Ranks
Above 50
Avg. Of
Seven
Value
Ranks
Value
Overall
Consumer Finance (13)
76
59
54
80
81
88
67
7
72
86
79
Diversified Banks (7)
76
42
73
76
78
79
74
6
71
77
73
Education Services (8)
74
74
55
49
53
53
77
6
62
77
54
Electric Utilities (23)
62
55
63
55
61
NA
56
6
59
71
56
Electronic Manufacturing
Services (13)
50
64
53
60
61
42
59
6
56
69
73
Life & Health Insurance (11)
78
70
77
86
89
92
72
7
81
89
83
Multi-Line Insurance (9)
78
73
86
80
80
61
78
7
77
83
63
Oil & Gas Refining
& Marketing (8)
85
94
52
80
83
47
79
6
74
84
86
Property & Casualty
Insurance (27)
78
69
69
71
71
64
76
7
71
80
72
Reinsurance (5)
90
55
83
74
81
89
75
7
78
85
82
Technology Distributors (9)
80
91
65
74
73
24
66
6
67
72
57
Tech Hardware, Storage
& Peripherals (14)
55
59
39
70
69
59
60
6
59
71
58
Notes: Quadrix scores are percentile ranks, with 100 the best.  Industries containing three or fewer companies are excluded.

 

Individual stocks: The table below presents 17 A-rated stocks that scored above 50 in at least six of the seven particularly effective value metrics. Nine are on our recommended lists, including the two profiled in the following paragraphs:

While other airlines have lost altitude, Alaska Air Group ($63; ALK) has stayed in the air. So far this year, Alaska's shares have risen 6%, while rivals American Airlines ($42; AAL), Delta Air Lines ($43; DAL), Southwest Airlines ($37; LUV), and United Continental ($54; UAL) posted double-digit declines.

Airlines as a group have plenty of investment appeal; the eight in the S&P 1500 Index average Quadrix Overall scores of 90 and Value scores of 85. Alaska stands out from the fleet in several ways:

➤ On-time performance: Nationally, 76.2% of flights from January through March of this year arrived on time. Alaska blew past the national aggregate with an 85.1% on-time rate.

➤ Passenger growth: In the year ended March, Alaska's revenue passenger miles rose 9%, versus a combined 2% for airlines in the S&P 1500.

➤ Load factor: Despite aggressive capacity increases — up 10.8% in the year ended March — Alaska's load factor was 84.8%, above the industry average of 83.3% and good for second-best among airlines in the index.

Alaska, which scores above 50 in six of the seven key valuation ratios and above 75 in four of them, is a Focus List Buy and a Long-Term Buy.


Foot Locker ($63; FL) isn't an absolute bargain, earning a Quadrix Value score of 65 and no super-high scores for the seven featured valuation ratios. Yet despite a year-to-date total return of 14%, the shares trade at 15 times projected year-ahead earnings, 23% below the average retailer and 18% below the average apparel seller.

In the April quarter, Foot Locker grew per-share profits 17% to $1.29, topping the consensus by $0.06. Quarterly revenue rose less than 3% but 8% at constant currency, supported by same-store growth of 7.8%. Operating profit margins for the quarter rose to 15.1% from 13.6% in the year-earlier period, driven by improved efficiency on both the inventory and store-operations sides.

Foot Locker's profits have topped the consensus by an average of nearly 10% in the last four quarters, and targets for the fiscal years ending January 2016 and 2017 have risen over the last three months. The consensus projects growth of 12% this year and 11% next year. Foot Locker is a Focus List Buy and a Long-Term Buy.

STRONG STOCKS IN KEY VALUE FACTORS
The 17 A-rated stocks below earn Quadrix scores above 50 in at least six of seven valuation ratios that have demonstrated particularly strong predictive power over the last three years and longer periods. Stocks on our recommended lists are presented in green. Industries among the most appealing based on the seven value factors are in bold.
-------------------- Seven Effective Valuation Ratios (Quadrix Scores) --------------------
Quadrix Scores
Company
(Price; Ticker)
Price/
Price/
P/E
P/E
Price/
Price/
Price/
Value
Overall
Industry
Aetna
($115; AET)
0.7
(83)
14.9
(76)
14
(66)
16
(70)
2.7
(41)
17
(63)
8.8
(65)
64
80
Managed
Care
Alaska Air
($63; ALK)
1.5
(60)
25.1
(52)
10
(88)
11
(91)
3.9
(27)
14
(78)
6
(86)
84
97
Airlines
Anthem
($163; ANTM)
0.6
(86)
19.0
(65)
15
(61)
16
(65)
1.9
(55)
17
(65)
6.8
(81)
65
88
Managed
Care
Berkshire
($145; BRKb)
1.8
(54)
20.9
(61)
17
(46)
18
(53)
1.5
(65)
18
(60)
9.3
(61)
68
81
Multi-Sector
Capital One Fin'l
($85; COF)
1.9
(52)
7.1
(92)
11
(86)
11
(89)
1
(83)
11
(88)
NA
(NA)
88
93
Cons.
Finance
Cigna ($135; CI)
1.0
(75)
21.3
(60)
14
(66)
16
(69)
3.2
(34)
17
(64)
8.9
(64)
60
86
Managed
Care
Corning
($21; GLW)
2.8
(38)
16.8
(71)
13
(72)
14
(77)
1.6
(63)
11
(87)
10
(56)
83
67
Electronic
Comp.
Foot Locker
($63; FL)
1.3
(66)
23.5
(55)
15
(62)
16
(66)
3.7
(29)
18
(60)
8.8
(65)
65
95
Apparel
Retail
General Motors
($36; GM)
0.4
(93)
NM
0
7
(98)
8
(97)
1.6
(61)
10
(91)
6.1
(85)
94
75
Auto
Manufact.
Lear
($117; LEA)
0.5
(88)
22.6
(57)
11
(86)
12
(86)
3.3
(33)
12
(85)
7.5
(75)
85
98
Auto Parts
Lincoln National
($58; LNC)
1.1
(71)
6.6
(93)
9
(93)
10
(93)
1
(86)
11
(90)
NA
(NA)
94
94
Life &
Health Ins.
Macy's ($68; M)
0.8
(79)
17.9
(68)
13
(72)
15
(75)
4.5
(22)
16
(68)
7.5
(76)
77
76
Dept.
Stores
MetLife
($53; MET)
0.8
(80)
4.1
(97)
9
(94)
9
(95)
0.8
(92)
8
(94)
NA
(NA)
99
98
Life &
Health Ins.
Southwest
($37; LUV)
1.3
(65)
22.2
(58)
10
(88)
11
(91)
3.7
(29)
17
(63)
6.4
(83)
87
94
Airlines
Target
($80; TGT)
0.7
(83)
19.1
(65)
16
(55)
17
(60)
3.6
(30)
18
(58)
8.6
(67)
73
85
General
Merch.
Travelers
($102; TRV)
1.2
(67)
14.1
(77)
11
(84)
11
(89)
1.4
(70)
10
(91)
5.9
(87)
93
70
Ppty. &
Cas. Ins.
Valero Energy
($59; VLO)
0.3
(96)
12.3
(83)
10
(91)
9
(96)
1.5
(65)
8
(95)
4.3
(93)
97
99
Oil & Gas
Refin.
Notes: Quadrix scores are percentile ranks, with 100 the best.  NA Not available.  NM Not meaningful.

 


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